Chapter 7: ICO & Crypto Project Valuation PDF

[[Chapter 7: ICO & Crypto Project Valuation]]{.smallcaps} ===================================================================== Introduction ------------ \"The best entrepreneurs see things as they are and not how they want them to be.\" - Arthur Rock What is an ICO? --------------- [Investopedi...

[[Chapter 7: ICO & Crypto Project Valuation]]{.smallcaps} ===================================================================== Introduction ------------ \"The best entrepreneurs see things as they are and not how they want them to be.\" - Arthur Rock What is an ICO? --------------- [Investopedia]: \'An **initial coin offering** (ICO) is a cryptocurrency\'s first issue to the public, **often accompanied by a white paper** describing the technology behind it. The investing audience determines its value.\' [Investopedia]: "An initial public offering (IPO) refers to the **process of offering shares** of a **private corporation to the public** in a new stock issuance for the first time." Main features: - **Regulated offering**: Requirements (e.g., from the SEC) - **Underwriting**: Pre-IPO price vs IPO price - **Private company going "public"** - Subsequent **audits** and **supervision** (listed company) Objective: - To **raise funds on the crypto market** by selling tokens to investors. - It is the **crypto industry\'s equivalent** of an IPO. IPO Process & Summary --------------------- - Main benefits: - Increased capital - Increased visibility - Liquidity - Raise capital in the future - Increased credibility with business partners - Main disadvantages: - Significant costs - Heavy supervision - Loss of control How Does an ICO Work? --------------------- - Main steps in the ICO process:\ 1. Project and team **creation**\ 2. White paper **development\ **3. **Token development**\ 4. Communication and marketing\ 5. **Pre-ICO** (private sales)\ 6. **ICO marketing campaign\ **7. ICO/**public sale**\ 8. **Token listing** (on CEX or DEX)\ 9. Token **release**\ 10. **Project development** What is a White Paper? ---------------------- - Binance: "A white paper **summarizes, in a single document**, the **important information** related to a blockchain or cryptocurrency project. It's a popular way of explaining how a certain pro - Main features: - **Project overview** and vision - **Problem** and **solution** - **Market analysis** and **products** - **Token omics** and **roadmap** - Team details The white paper is the **equivalent of the pitch deck in tradFi** - A crypto white paper provides investors and readers with the key information about a project, such as: - Project overview and vision - Problem and related solution - Products and services - Market analysis - Technical details - Tokenomics - ICO phases and listing - Roadmap - Team, etc Pitch deck ---------- - A pitch deck is a presentation (e.g. Power Point) that is used to pitch an idea, project or company to potential investors such as venture capitalist (VC) firms. - Main features: - Problem - Product/Solution - Business plan and model - Projections - Market, team Tokenomics ---------- - [Investopedia:] \'Tokenomics refers to **the distribution, circulation, and total supply** of a given cryptocurrency.\' - Token omics design is a **crucial element** for a successful project. Much like the white paper, the quality and consistency of token omics **should be reviewed** before investing in any project - Key components of token omics:\ - Token **supply** (max and circulation)\ - Token **utility\ **- **Allocation and distribution plans**\ - **Deflationary mechanisms** (e.g., token burns)\ - Incentive mechanisms 8. Demand vs supply - Demand and supply are the **two primary factors driving token** price movements. - Achieving the '**perfect mix'**: - Generate **substantial/genuine demand** for the token through its utility and incentives within the project. - **Manage/Limit the token supply** (creating scarcity) using a **well-structured token** release schedule and deflationary mechanisms. **Output \>\> Value for users and investors** 9. Pre-ICO or "Private Sales" - Private sales aim to **offer tokens to close** associates, friends, and early investors. - Funds raised are typically used **to initiate the project**, often leading to the creation of an MVP (Minimum Viable Product). This lays the **groundwork for organizing** the subsequent **public sale** and **managing associated tasks**. - Features: - Discounted price - Limited supply/investors - High risk - High return expected 10. ICO Marketing Campaign - Marketing is essential for a successful ICO, given the intense competition and the multitude of ICOs and new projects that investors encounter. - Main steps: - Develop an engaging website - Create a solid white paper - Leverage social media - Use Influencer marketing - Build a strong community - Consider airdrops and bounty campaigns 11. Public Sales - Main methods: - **ICO**: Tokens are directly sold on the project webpage. - **IEO**: Initial Exchange Offering, tokens are sold on an exchange (e.g. Binance). - **IDO**: Initial DEX Offering, tokens are sold on an DEX (e.g. Uniswap). - **INO**: Initial NFT Offering, NFTs are sold on the webpage or DEX. - **STO**: Security Token Offering, regulated financial products such as tokenized equity, bonds etc. (not utility tokens).  --------------------- 12. Valuation - Investopedia: "Valuation is a quantitative process of determining the fair value of an asset, investment, or firm. There are many techniques used for doing a valuation." - Main features: - Absolute vs relative valuation models - Valuation methods: DCF, Multiples, Comparable, etc. - Involves some degree of judgment and assumptions - Valuation review conclusion: "Reasonable valuation" 13. Main Valuation Methods Absolute Valuation Models: - **Book value**: or Net Asset Value ('Net Equity'). Formula = Assets - Liabilities - **Market capitalization**: Total value of all outstanding shares of a publicly traded company. - **DCF**: "Discounted Cash Flow" model estimates the **value of an investment** based on its expected **future cash flows**. Use a discount rate to to \"discount\" future cash flows back to the present. Simply put, DCF seeks to determine the current value of expected future cash flows, considering the time value of money. Relative Valuation Models: - **Multiples**: Used to value a company by comparing it to similar businesses by looking at metrics like earnings (e.g. Price-toEarnings 'P/E' ratio), sales, and book value. - **Comparable:** \"Comps method\" or \"Comparable Company Analysis (CCA),\" involves valuing a company based on the valuation of similar companies. Selection of a comparable company and the appropriate multiple to use, such as the P/E ratio. The idea is that similar companies, under similar circumstances, should be valued similarly.  - When do we need a valuation? We typically require a valuation when considering an investment in a crypto project. - Before delving into the valuation process, let\'s begin with the initial steps of reviewing a crypto project: - 1\. White paper (incl. tokenomics, team etc.) - 2\. Website/Platform/Technology - 3\. Products/Services/Market/Solution offered - 4\. social media/Community - 5\. Security/Smart contract audits 6. Legal and compliance Evaluating a crypto project is newer and more complex than in traditional finance. Why? - Young industry - Lack of historical data - Volatility - Regulatory changes - Technology evolution - Level of adoption - Intangible value of projects 14. Crypto Valuation Models - In the dynamic world of cryptocurrencies, various innovative valuation models have emerged to navigate and gauge the inherent complexities of digital assets. - Market approach: Quoted prices or comparable tokens - Income approach: Expected token cash flows - Cost approach: Opportunity cost of utility or cost of generation - QTM: "Quality Theory of Money" - Network Value to Transactions (NVT) Ratio - Metcalfe\'s Law - Token velocity 15. QTM Model - Investopedia: "According to the quantity theory of money (QTM), the general price level of goods and services is proportional to the money supply in an economy, assuming the level of real output is constant and the velocity of money is constant." - Formula: MV = PQ - Interpretation: Prices of goods increase if the money supply increases (inflation). 16. NVT Ratio - Glassnode: "Network Value to Transactions (NVT) Ratio describes the relationship between market cap and transfer volume. Per Willy Woo, its creator, NVT can be considered analogous to the PE (price to earnings) Ratio used in equity markets - Formula: NVT = Network/BTCorUSD daily Value - Interpretation: A lower NVT indicates that for each unit of value on the network, there\'s a higher amount of transactional activity, which might suggest undervaluation. 17. Metcalfe's Law - Investopedia: "Robert Metcalfe, the creator of Ethernet, stated that the value of a telecommunications network is proportional to the square of the number of connected users of the system." - Formula : - Interpretation : Networks that grow their user base exponentially can expect a squared growth in value 18. Token Velocity - **Invest.net**: "Token velocity represents the frequency at which a token is traded. High token velocity indicates that a token is not being held long and is quickly traded -- potentially decreasing demand." - **Formula**  - **Interpretation: :** If a token provides utility and holding incentives, like staking or voting, its circulation may slow, potentially raising its value. 19. Valuation Conclusion **Conclusion**: The valuation of a **crypto asset** or project primarily **depends on its characteristics,** with a central factor being if the asset/project provides the holder with future cash flow rights. Consequently, no single method suffices; instead, **a blend of traditional and new valuation techniques is often optimal.**